Asked by Christine Dawson on Jun 20, 2024
Verified
You own two put option contracts on Magpie stock with an exercise price of $37.50. What is the total intrinsic value of these contracts if the stock is currently selling for $35.90 a share?
A) -$320
B) -$160
C) $0
D) $160
E) $320
Intrinsic Value
The perceived or calculated true value of an asset, investment, or company based on fundamentals, excluding market value fluctuations.
Put Option
A financial agreement that allows the owner to sell a predetermined quantity of a fundamental asset at an agreed-upon price during a certain period, without being obligated to do so.
Exercise Price
The price at which the holder of an option can buy (call) or sell (put) the underlying asset or security, as specified in the option contract.
- Identify the components and calculation of intrinsic value in options trading.
Verified Answer
PK
Poonnapojn KalaraJun 27, 2024
Final Answer :
E
Explanation :
The intrinsic value of a put option is calculated as the exercise price minus the current stock price, provided this difference is positive; otherwise, it's zero. For one put option on Magpie stock, the intrinsic value is $37.50 - $35.90 = $1.60. Since each contract typically covers 100 shares, the value per contract is $1.60 * 100 = $160. Owning two contracts doubles this value to $320 in total.
Learning Objectives
- Identify the components and calculation of intrinsic value in options trading.